Building proper foundations a key to Chinese firms' staying power in Africa, lawyer says

As more and more Chinese companies set up shop in Africa, they need to realize that trying to get around or ignoring local laws is the surest way to make their stay a short one, an expert on African legal matters says.

"Labor disputes and contract conflicts are the most commonly seen legal cases in Africa," says Zhou Zhenguo, partner in King & Capital Law Firm of Beijing, one of the oldest legal partnerships in China. Previously he specialized in corporate law and dealt with mergers, acquisitions and company listings for more than 10 years.

"The big state companies are doing much better in this area, but small private enterprises don't pay enough attention to this issue due to cost-saving considerations."

Chinese companies have advantages over Western firms that they should not squander, says Zhou, who is also director of the African Legal Affairs Center. The center was formed in 2012 by the King law firm and the China Africa Industrial Forum to assist Chinese firms doing business in the continent.

"First, China didn't have any colonial history in Africa, so there is no historical burden on Chinese companies, and most sub-African countries have relatively good relations with the Chinese government," Zhou says.

"Second, the financial support from the Chinese government is phenomenal. Figures show that loans from the Export-Import Bank of China have exceeded the total amount from the World Bank."

But those advantages can be wasted. Some Chinese businesses in Africa discount the importance of local legislation, leading to trust-destroying conflicts, Zhou says.

For example, in 2012 local workers attacked a Chinese coalmine in Zambia became the mine owner delayed raising the minimum wage, as the Zambian government required.

And in Ghana last year, more than 100 Chinese workers were arrested when some small companies did illegal gold mining.

Some companies are so ill-informed about Africa that they think they can easily handle such cases by bribing officials, Zhou says.

He warns that to be successful in long-term development in Africa, investors should never take such risks.

"African people have a strong sense of law, especially when it comes to labor and environmental issues. This is more or less a legacy from the colonial age, when they were deeply influenced by the Western legal systems."

Chinese companies involved in industries such as oil exploitation and mining have to be doubly careful, both to respect the local laws and to protect their own interests, Zhou says.

"Natural resources are always the biggest targets that countries are fighting for, and complicated national interests get tangled up inside these areas. Therefore, they are the bargaining chips of African governments, because many of them don't have strong manufacturing industries, and the natural resource is where their biggest revenue comes from.

"Chinese companies in natural resources businesses have to be on their toes regarding local laws and regulations, so there is less of a chance of confiscation, as in many previous cases in Africa."

With more Chinese companies taking root in Africa, more legal issues will arise, Zhou says, especially in several areas where Chinese firms cluster: textiles, construction, mining and the solar industry.

"Previously, Chinese projects in Africa were mostly aid projects," Zhou says. "But now the landscape has quietly changed as some industries in China have to find an outlet for their surplus products."

"As labor costs soar, labor-intensive industries such as textiles and shoe-making have to migrate to other places with lower costs. Resources companies such as coalminers have to go overseas for more resources. "The overcapacity problem with solar panels is severe in China and Africa would be a good destination with plenty of sunlight - although this won't happen very soon given the development stage of most African countries."

Still, Zhou says, this is an optimal time to invest in Africa. "Chinese companies will eventually go out into the world, and the investment threshold in Europe and the United States is too high."

Zhou says investment options are still limited in Europe and the US. "For instance, clients coming to our firm for consultation generally focus on real estate in the US and pharmaceutical and other high-tech industries in Europe. But the investment areas are much broader in Africa."

Even compared with South America, another popular investment destination for Chinese companies, Africa is a much easier market to enter, Zhou says.

"So far most investments in South America are in agriculture and mineral resources, and the legal requirements there are even more stringent. If Chinese companies act quickly in Africa, they can take over the middle and high-end market."

The continent also provides many opportunities to Chinese law firms, opportunities that are not always fulfilled, he says.

"Legal issues are crucial if Chinese companies want to have long-term operations in Africa. Chinese law firms should also inquire about the needs of Chinese clients and help them to develop more smoothly in Africa."

But sometimes small to medium- sized Chinese companies find that Western law firms are too expensive, while Chinese firms are not so widely available.

China's large state-owned companies tend to consult big international law firms.

"The high charge is not a problem for these companies," Zhou says. "They only want to reduce risks as much as possible."

After hundreds of years of presence in Africa, Western law firms, especially UK and French firms, are very powerful in Africa. They hire local lawyers who know the laws and policies very well and dominate this field.

To break this monopoly, Chinese law firms should seek local partners, Zhou says. Last year, King & Capital joined Africa Legal Network, an organization of more than 20 members. Most members were listed as top law firms by the journal International Financial Law Review.

Physical presence is also important, Zhou says. "When conflicts happen, companies usually go to local law firms for help. So Chinese law firms should first increase their visibility in Africa."

Most Chinese investment in Africa is still done by state companies. Private enterprises are more numerous, but not in investment scale, except for Huawei and ZTE, Zhou says.

"To have sustainable development in Africa, there must be more dynamic private enterprises, and they will be the major clients of Chinese law firms in the future."

(China Daily Africa Weekly 07/04/2014 page32)